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Part 2: Piecing Together Section 529
Part 3: Uncovering Coverdell Accounts
Part 4: Filling in the Gaps: More Ways to Save for College
Minimizing a Coverdell account’s impact on financial aid
Introduction
Welcome to 529 & Education Savings Plans For Dummies , the practical reference for those who are thinking about and planning for all types of education in the future for themselves or those nearest and dearest to them and who want an explanation of all the options — pro and con — that can help them save for it.
Education. Whether you’ve had an abundance of it or feel that you’re missing a few courses here and there, you’ve read all the information, looked at the charts and graphs, and know that people with the best educations land better jobs and earn better pay than those who don’t. So, of course, because you want the very best for yourself and your family (you do — that’s why you’re reading this), you want everyone you know, including yourself, to have that opportunity.
That is until you look at the price tag. You’re already paying for food, housing, and clothing (not to mention phone, cable, insurance, and everything else under the sun, including dog grooming) and maybe even stashing a little bit into your retirement plan. And then, you sneak a peek at the projected cost of private school or college for the year in which your student expects to begin. And just as you never look at the least wrinkled car in a car crash, your eye automatically drifts to the highest number on that chart of projected costs. And you begin to see stars.
There’s no question: Education costs continue to soar, even when the rest of the economy stagnates, and this reality is not likely to change any time soon. Fortunately, everyone, including you, the various governments (federal and state), and the schools themselves, are in on this secret. Everyone can plan well in advance of that eventual first day of school — whether it’s kindergarten or graduate school — and plot ways to get that child there and how to help you pay the bills when they come due. Consider this book to be your accomplice.
About This Book
The world of education savings plans is forever changing (or so it seems, as legislative leaders can’t seem to resist continuously tweaking the laws). This is another way of saying that it also can be complicated and confusing for everyone, including professionals, financial planners, tax folks, and your local bank or brokerage.
In this one-size-fits-all world, the powers that be have recognized that all people don’t save money the same way. Some save more, some save less, some can live with risk, and others can’t tolerate any risk. Clearly, no two are alike, but you’re all present or potential savers. Numerous options exist that make saving possible and desirable for everyone.
Piling savings option upon savings option has created opportunities for most people. But all the new options have also muddied the waters because choosing between Plan A and Plan B can be downright difficult when they seem so similar. So, many people may choose to opt out, admitting confusion and doing nothing because it’s all so confusing, and no one wants to screw up a choice with so much riding on it.
And yet, it doesn’t have to be that way. I’m here to tell you that it is possible to understand the costs associated with education, both right now and in the future. It’s also possible to find ways to pay for those costs in the most advantageous manner for you, both from a personal and tax perspective. And you can’t focus on the personal and ignore the tax implications, nor can you do the reverse. Both are essential components, and the most successful savings program considers both elements.
That’s where this book comes in. It’s designed to explain the strategies out there to help you save, save, save. There’s no doubt that the bill will be large; there’s also no question that, with planning, strategy, and purpose, you can achieve your goal and provide the means that will allow you and your family all the benefits of a quality, paid-for education.
529 & Education Savings Plans For Dummies is simply a way to find a reasonable solution to a seemingly unreasonable problem: saving for future education costs in the sanest, least stressful way possible. In keeping with the theme of stress reduction, you can use this book in a variety of ways:
» As a reference: It’s all here: the ins, the outs, the do’s, and the don’ts. The world of education savings is one of very specific rules, and they’re here, in all their glory, and they’re all explained.
» As an advisor: It’s a case of the very good savings techniques, the merely okay savings techniques, and the truly ugly techniques (which you really want to avoid), and this book highlights them all. Indeed, what works for you may not work for your neighbor, but every savings option involves risks, concerns, and just-plain crystal ball reading. This book explores all the ups and downs and ins and outs.
» As a little light reading: Amazingly enough, the topic of money can be mildly amusing, and education savings is no exception. Read this with an eye toward the absurd, and you won’t go far wrong.
Parts of 529 & Education Savings Plans For Dummies are about very specific situations you will most likely never encounter. Still, this book would be lacking as
a complete reference if I didn’t include a lot of the minutiae in the text on the chance that someone, somewhere, may need to know what happens to a Section 529 plan in the event of a death of a plan owner, for example.
Also, as a caution, be aware that any projections in the book are just that: projections. I have no special hotline to the powers that determine rates of returns on investments, increases in tuition payments, inflation rates, tax rates, utility rates, or postage increases (which might be really useful). Increases and decreases may be greater or lesser over time — I have no way of really knowing. All the projections should provide you with is a picture of relationships between like numbers; don’t read any more into my crystal ball projections than that.
Conventions Used in This Book
To help you navigate through this book, I use the following conventions:
» Italic is used to emphasize and highlight new words or defined terms.
» Boldfaced text indicates keywords in bulleted lists or the action part of numbered steps.
» Monofont is used for Web addresses.
» Sidebars, which look like text enclosed in a shaded gray box, consist of information that’s interesting to know but not necessarily critical to your understanding of the chapter or section topic.
Foolish Assumptions
The world of money and taxes is rife with assumptions, foolish and otherwise. Here are some of the assumptions I’ve made about you:
» You’re not aware of the variety of ways to save for education available to you, or you’re aware but baffled by the number of plans or the way the plans work.
» You may have some idea of how much sending Junior to college will put you back, but you need more details.
» If you’ve been saving for college and now find out that you can pay for private school tuition with your plan, you probably feel as though you’re not saving enough.
» You can’t walk into a bookstore or surf the Internet without buying every book you see with a snazzy, eye-catching, strikingly-appealing, jaw-droppin’, good-looking, yellow-and-black cover.
» If you’re not yet saving for any form of education, you may feel that you don’t have room in your budget for that expense. After paying your monthly living costs, you may have nothing left to save.
If you identify with any of the above, 529 & Education Savings Plans For Dummies gives you the information you need to start saving or kick your savings into high gear.
How This Book Is Organized
This book takes all the different components of education savings — from its necessity, through all the different sorts of savings plans, and finally to how to augment with grants, loans, and scholarships — and breaks them down into easily digestible chunks (okay, parts, if you want to get technical about it). Each part is comprised of a few chapters. The following briefly describes each part:
Part 1: Figuring Out the Cost of Education — and How to Pay It
There’s no question; the number is huge, but how huge is it? Sounds like the start of a bad joke, eh? Well, it isn’t a joke, but dealing with the big cash question doesn’t have to be that bad. After a brief overview of the scope of the book, this part looks at the current and projected future cost of education, including primary and secondary schools, apprenticeships, vocational and trade schools, public and private colleges, two- and four-year institutions, and graduate and professional schools. It focuses on savings techniques, and finally, it lets you know who’s available to make contributions to the savings pool.
Part 2: Piecing Together Section 529 Plans
A venerable member of the education savings plan sweepstakes, Section 529 plans offer seemingly unlimited choices and high contribution limits (at least if you listen to the people who are trying to sell you their particular plan). This part
dissects these plans, explaining how they work, why they work, and when they work — or don’t — as the case may be.
Part 3: Uncovering Coverdell Accounts
Coverdell Education Savings Accounts (formerly known as Education IRAs) have now become real players in the education savings arena, and more and more financial advisors, banks, and brokerages are touting their benefits. This part explores them in full detail, showing their good and bad points and explaining how and when they might (or might not) make sense for you.
Part 4: Filling In the Gaps: More Ways to Save for Education
Saving for education has been around a lot longer than Section 529 plans or Coverdell accounts. So Part 4 examines some of the more traditional ways to save and shows situations where these tried and true methods still may make sense for you. But what happens when all else fails and your savings come up a bit short? This part explains how the world of financial aid works — loans, grants, and scholarships —and how the money you’ve saved for college may factor into financial aid decisions.
Part 5: The Part of Tens
It’s the part you’ve hopefully come to know and love. The For Dummies Part of Tens — this time with an education-savings twist. Do you like easily accessible top-ten lists? Here you go. The whole point of so-called “education savings plans” is first, to save, and second, to pay as little tax on your savings as possible. The chapters in this part give you hints on saving successfully and tell you what you must do to dodge as many taxes as possible. The book includes one final element that’s not technically a Part of Tens — it lists way more than ten things. But I thought I should let you know about the appendix, which gives you a more detailed look at the various Section 529 plans offered by each of the 50 states and the District of Columbia, plus one private prepaid tuition plan. The appendix gives you an apples-to-apples comparison of what is currently out there so you can make the best decision for your particular situation.
Icons Used in This Book
The icons you come across in this book identify information or words of caution that you may find especially helpful.
You have a lot to remember when trying to slot your savings into the rules and regulations surrounding many of these education savings plans. This icon alerts you to important information you don’t want to forget because it can often make the entire process of saving for education go a lot more smoothly.
If you’re the type of person who always needs to know more than the basics, check out the information next to this guy. It points out information that you don’t absolutely need to know to save (but you can always use it to impress your friends).
Life is rarely straightforward, and saving for education may be even less so. When you see this icon, you’ll find a strategy to help you get the most out of your savings or make it easier to put money away.
This book is littered with ideas of what not to do if you want your education savings plans to succeed. When you find this icon, you’ve just landed on one of them.
Beyond the Book
If you want to go beyond this book, check out the Cheat Sheet, where I summarize the different college savings plan avenues available to you, from 529 plans, Coverdell accounts, Series EE and Series II savings bonds, and other savings vehicles.
Where to Go from Here
If you want to and have the time, you can read this book from cover to cover. This book gives you a great view of how much, how, and where to save money for education. But if you don’t have the time or the interest, you may choose to hop around from topic to topic, skipping those that don’t apply to you and paying more careful attention to those that do. That’s one of the great things about For Dummies books. You can get in and get out wherever and whenever you choose. If the information you need to understand a certain topic is covered elsewhere, the text will direct you, so you don’t need to worry that you’re missing basic information by skipping over a portion of the book.
1 Figuring Out the Cost of Education — and How to Pay It
IN THIS PART . . .
The skinny on education savings
Get the down-low on education costs
Find out what resources are available
Discover the tax implications of funding education savings accounts
